How would farm bill proposals impact Arkansas rice farms?

The Senate Agriculture Committee has yet to craft its version of the next farm bill. However, with the USDA and House having weighed in, University of Arkansas graduate student Jeff Hignight has calculated how Arkansas rice farms would fare under both proposals.

He presented those calculations at the recent Rice Research and Extension Center field day in Stuttgart, Ark.

“For my thesis I looked at the impact of each USDA proposal and commodity program provision,” said Hignight, who studies under UA agriculture economist Eric Wailes. “I did the same with the (proposed farm bill) legislation passed by the House recently.”

Hignight's study uses a continuation of the 2002 farm bill provisions as a baseline to compare the impacts of the USDA proposal and recently passes House bill, H.R. 2419.

The USDA proposal would increase direct payments and, in place of a price-based program, would change the counter-cyclical to a revenue-based program.

“Our analysis shows that would actually be beneficial — or, at least not harmful — for most farmers.”

The USDA has also proposed eliminating the three-entity rule. “It wants to change the payment limits for the loan program, the counter-cyclical and direct payments. They'd also eliminate the ability of a spouse to participate in the commodity programs and lower the adjusted gross income (AGI) limit to $200,000.”

With H.R. 2419 passed just before August recess, the House would extend the current direct payment rates and offer producers a one-time choice between the current counter-cyclical price-based program and a revenue-based counter-cyclical program proposed by the USDA.

“There were also a few minor adjustments to target prices and loan rates — but nothing changed for rice. The target price for wheat and soybeans would increase. The loan rate for cotton was kept the same although the target price was lowered from 72 cents to 70 cents per pound.”

The House also voted for stricter payment limits and removing the three-entity rule.

“For the loan program, current law has payment limits but producers are able to secure generic certificates. That means, in effect, there is no limit for the loan program. The House legislation would do away with the generic certificates and doesn't put a maximum on loan benefits a producer can receive.

“It did that to make payment programs more transparent.”

When the three-entity rule was axed, the direct payments limit was increased from $40,000 to $60,000. “Basically, that was done by taking away one of the three entities. Under the current farm bill with the three-entity provision, there's an $80,000 maximum.”

With the counter-cyclical program, the House retains the $65,000 CCP limit.

The House kept spousal participation in its bill. “Therefore the payment limits cited for the single entity can be doubled for the farm operation if the producer is married.”

Absentee landowners

A main focus of the House proposal seems to be absentee landowners. “The Scottie Pippens of the world are under more scrutiny.

“The AGI means test (three year average) was lowered to $500,000 unless at least two-thirds of your income is from agriculture or forestry. If you fit the two-thirds criteria, the AGI threshold is set at $1 million. “That means that normally, a married, full-time farmer can hit $2 million — $1 million each for the operator and the spouse.”

Hignight says the AGI will impact more landowners than producers. There will be a few producers impacted “but not many.”

The agriculture economists have been checking what the USDA proposal would do to eight representative Arkansas rice farms (from 1,200 acres to 6,500 acres). The USDA proposal “wouldn't be friendly to any of the farms except the smallest — and that farm only saw a slight increase in net returns based on higher direct payments and not having been impacted by reduced payment limits.”

The loan rate would have a larger negative impact on cotton farms than rice/soybean farms. That's because “the last five years of cotton haven't seen high target prices. That means the loan rate would be less than the current program's 52 cents.

“But the main reason the USDA proposal hit Arkansas farms so hard is the proposed reduction in payment limitations. That isn't surprising.

“What was interesting was the counter-cyclical revenue program. Under the House legislation, every one of the farms that kept the price-based counter-cyclical program was negatively impacted compared to an extension of current law.”

Under the counter-cyclical revenue program, three of the farms had slightly higher incomes than the baseline. Six of the eight farms were better off with the revenue program rather than price-based.

The two that weren't better off were the largest farms. The reason they didn't do as well “is because of the stricter payment limitations. The revenue program would take into account the price and yield risk. During simulations, there was a lower probability of a counter-cyclical revenue payment than a counter-cyclical price-based payment.

“However, the revenue-based payments when made were on average larger than the payments using the than the price-based approach.”

Probabilities

The numbers presented in the accompanying graph are based on a soybean/rice farm in Stuttgart with 3,600 acres. The graph shows the probabilities of returns per acre from the simulations based on the alternative proposed legislation.

“Each scenario was simulated 500 times. All the red represents the probability of having a negative return. The yellow is the probability of having a return between zero and $75 per acre. The green represents the probability of having returns above $75 per acre.”

The simulations show that the USDA proposal, if implemented, increased the probability of a negative return relative to an extension of the 2002 farm bill. The smallest probability of negative returns is generated by the House bill with the counter-cyclical revenue program.

Farmers should also know “the counter-cyclical revenue program can indirectly increase the base yields just by the way it calculates the national target revenue.

The simulated results based on the House bill provisions are at least as good, or better, than an extension of the current 2002 farm bill. And (they're) clearly better than the USDA proposal.”